Tribunal Upholds Dismissal of Appeal on Revenue Expenditure under Income Tax Act

The Tribunal upheld the decision of the CIT(A) in dismissing the appeal and confirming the treatment of Revenue expenditure claimed under Section 35D of the Income Tax Act. It found that the assessee had not commenced any business activity during the relevant assessment year, emphasizing the difference between "setting up" and "commencement" of business. The Tribunal ruled that expenses incurred before revenue generation but after setting up the business were not allowable as Revenue expenditure.

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Issues Involved:
1. Treatment of Revenue Expenditure claimed under Section 35D of the Income Tax Act.
2. Determination of the "setting up" of business versus the "commencement" of business.

Detailed Analysis:

1. Treatment of Revenue Expenditure claimed under Section 35D of the Income Tax Act:

The core issue in the appeal was the treatment of Rs. 48,72,391/- claimed by the assessee as Revenue expenditure under Section 35D of the Income Tax Act. The Assessing Officer (AO) had disallowed this claim on the grounds that the business activities had not yet commenced during the relevant assessment year (AY 2015-16). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision, leading to the appeal before the ITAT.

The assessee argued that the business had been "set up" in the Financial Year 2014-15, and therefore, the expenses incurred should be allowed as Revenue expenditure in the same year. The assessee provided a chronological sequence of events to establish the setting up of the business, including the incorporation of the company, opening of a bank account, receipt of share capital, leasing of premises, appointment of personnel, and obtaining statutory approvals.

2. Determination of the "setting up" of business versus the "commencement" of business:

The assessee contended that the AO and CIT(A) had failed to distinguish between the "setting up" of business and the "commencement" of business. The assessee cited various judicial precedents, including the Madras High Court's decision in Ascendas IT Park Chennai Ltd. vs. DCIT, which emphasized that the date of setting up of business is the initial stage in the chain of events leading to full-fledged operations and is distinct from the commencement of business.

The assessee argued that the Revenue Authorities had incorrectly placed the assessee on the same footing as a manufacturing concern, where the commencement of business is marked by the production of goods. In contrast, the assessee's business, which involved trading, could be set up with the availability of financial resources, appointment of personnel, leasing of premises, and obtaining statutory approvals.

The assessee provided evidence of having received Rs. 1.22 crores as share capital, appointed a Managing Director and an Executive Assistant, leased a residential cum office premises, and obtained necessary statutory registrations and approvals. The assessee also cited several judicial decisions supporting the contention that expenses incurred after the setting up of business but before the commencement of revenue generation should be allowed as Revenue expenditure.

Tribunal's Decision:

The Tribunal examined the Profit & Loss Account and Balance Sheet of the assessee for the year ended 31.03.2015. The Director's Report categorically stated that the business activities were yet to commence. The Tribunal noted that the first import and sale occurred only in the subsequent financial year, and the primary requirement of funds and the certificate for inflow were received only on 28.03.2015.

The Tribunal concluded that the assessee had not provided sufficient evidence to prove that any business activity had commenced during the relevant assessment year. Consequently, the Tribunal upheld the order of the CIT(A), disallowing the Revenue expenditure claimed by the assessee.

Conclusion:

The appeal filed by the assessee was dismissed, and the Tribunal upheld the decision of the CIT(A) in confirming the treatment of the Revenue expenditure claimed under Section 35D of the Income Tax Act. The Tribunal emphasized the distinction between the "setting up" and "commencement" of business and found that the assessee had not commenced any business activity during the relevant assessment year.

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